Originally published by Guest Blogger James G. Cramp.
The National Defense Authorization Act for Fiscal Year 2016 defined a modernized retirement system, or MRS, for individuals entering military service on or after January 1, 2018. Service members with less than 12 years of service on December 31, 2017, have the option of remaining with the current military retirement system or switching to the new one. (NDAA 2016, Sec. 631) The decision window in which an eligible service member may opt in is one year, starting January 1, 2018, and ending December 31, 2018. Id.
Under the new system, the retired pay multiplier is reduced from 2.5 percent to 2 percent times the number of years of creditable service at retirement, which factors in determining the service member’s monthly retired pay. (NDAA 2016, Sec. 631) Thus, a service member retiring with 20 years of creditable service will receive 40 percent (instead of 50 percent) of his highest 36 months’ base pay. Id. This reduction is blended with automatic enrollment in the Thrift Savings Plan, a defined contribution plan, with the opportunity for matching contributions from the government. (NDAA 2016, Sec. 632) Thus, a service member in the MRS is referred to as a “full TSP member.” (NDAA 2016, Sec. 631)
Full TSP members receive an automatic government contribution to their TSP account of 1 percent of basic pay. (NDAA 2016, Sec. 632) These members are enrolled automatically at the default rate of 3 percent contribution from the member’s base pay, which can be adjusted up or down by the member, and the government will then match a member’s own contributions up to a maximum 5 percent match, ceasing at 26 years of service. Id. Full TSP members are vested in the government match after two years’ service.
The National Defense Authorization Act for Fiscal Year 2017 expanded the 2016 legislation’s use of continuation pay, a form of retention bonus, for full TSP members. Continuation pay may be offered to these members between the eight- and 12-year point if the member contracts to serve not less than three additional years. (NDAA 2017, Sec. 632) Continuation pay will be not less than 2.5 times the member’s basic pay for active duty or not less than half basic pay for reserve and guard members, as determined by the secretary of defense. Id. Presumably, differences in continuation pay will be driven by retention levels among military occupational specialties. The compensation may be taken in either a lump sum or a series of not more than four payments.
Service members in the new system will have options on how they wish to receive their military retired pay beyond the normal monthly installments commencing at retirement and continuing until death of the member. Under the MRS, the member may take a lump sum (discounted to net present value) equal to 50 percent of the monthly retired pay they would receive from the date of military retirement until the date of eligibility for social security retirement, plus 50 percent of monthly military retired pay the member otherwise would receive, according to the law. Alternately, the member may opt to take a 25 percent lump sum, plus 75 percent of the monthly military retired pay the member otherwise would receive.
The secretary of defense will determine the assumptions used in computing the net present value. No adjustment to the lump sum is permitted should, over time, the secretary’s assumptions in computing the net present value prove to have been to the member’s disadvantage. Before any lump sum payment may be made, any reduction for Veterans Affairs disability compensation must be factored. Retirees who have opted for a lump sum and reduced monthly retired pay are restored to full retired pay at their Social Security retirement age.
For family law practitioners, ideally, the modernized retirement system should mean there will be considerable amounts in Thrift Savings Plans and less monthly retired pay, and, perhaps some remaining balance of continuation pay, to divide in divorce. From my experience practicing military divorce, reality may prove that there will be only modest amounts in Thrift Savings Plans and less monthly retired pay to divide in divorce.
By my observation, many junior and mid-grade military families live paycheck-to-paycheck or close to it. Without significant home budget adjustments, many might not be able to take maximum advantage of the government match for the TSP. It may also be prudent to consider adding language in a decree and domestic relations order that prohibits a service member from opting for a lump sum and reduced monthly retired pay that might disadvantage a former spouse if the secretary’s assumptions in calculating the lump sum, over time, prove detrimental. With respect to calculating the lump sum, the complexities of factoring the VA disability compensation offset are many given the backlog of claims still existing at the VA.
These are just a few areas for military divorce practitioners to consider as the body of knowledge about the modernized retirement system grows with its implementation.
James G. Cramp is a retired U.S. Air Force colonel and the founder of and principal in the Cramp Law Firm, which provides a spectrum of family-related legal services in the San Antonio region. Learn more at cramplawfirm.com.
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